Net profit for 1Q24 was +21% year-on-year, increasing profit forecast and target price, and Xingrong Environment released its quarterly report. 1Q24 achieved revenue of 1.85 billion yuan (yoy +17%), net profit of 460 million yuan (yoy +21%), deducting non-net profit of 450 million yuan (yoy +22%). Sewage treatment service fees in central urban areas of Chengdu have risen, and revenue and gross profit margin for sewage treatment services have been raised. Raising the profit forecast, we expect the company's 2024-2026 EPS to be 0.72/0.79/0.85 yuan, respectively (previous value 0.69/0.76/0.82 yuan). Comparatively, the company Wind unanimously expected an average PE value of 12 times in 24, giving the company 12 times PE in 24 years, with a target price of 8.64 yuan (previous value of 8.28 yuan), maintaining the “increase” rating.

In a new round of price cycle, revenue and gross margin of sewage treatment services were raised. According to the approval of the Chengdu Municipal Finance Bureau, the provisional average sewage treatment service fee for the fifth phase of Chengdu (2024-2026) was 2.63 yuan/ton, an increase of 0.48 yuan/ton (22% increase) over the average price for the fourth phase (2021-2023). Among the sewage treatment projects currently in operation and under construction by the company, the central urban area of Chengdu accounts for about 58% of the scale. Considering the increase in sewage treatment fees, we will increase revenue from sewage treatment services by 7.6%/3.5%/3.5% and gross margin by 0.9/1.9/1.9pp from 2024 to 2026.

Increased credit impairment losses partially offset the impact of rising gross margins

The gross margin of the 1Q24 company was +1.7pp to 43.9% year-on-year, thanks to the impact of the above sewage treatment fee increases and the optimization of the business structure. The company's expense ratio remained basically the same year on year. Among them, the sales/management expenses ratio decreased by 0.1/0.6 pp year on year, while the R&D/finance expense ratio increased by 0.2/0.5 pp year on year. The company's credit impairment losses increased +166% year over year to 55 million yuan, mainly due to an increase in the amount of bad debts due to the increase in the size of accounts receivable.

Taken together, 1Q24's net profit margin was +0.8pp to 24.7% year-on-year, and profitability increased slightly.

Risk warning: Risk of electricity prices falling from waste incineration; project commissioning progress falls short of expectations.